The Dollar-Yuan superiority war


China has never veiled its intention to have its currency, the Yuan, take the centre stage in shaping global economy because of its belief that this would enable it have a better control of its domestic economy as many of the countries and companies that trade with China usually go through a third currency, especially dollar. As far back as 2009, former Governor of China’s  central bank, Zhou Xiaochuan, while delivering a speech at the Council on Foreign Relations, said, “The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations.” So, having the Yuan as a major player on the global scene is a strong state policy for the communist country.

The dream inched close to becoming a reality on November 30, 2015 when the International Monetary Fund (IMF) gave the Yuan the status of a reserve currency. A major success was also recorded on October 1, 2016 when the Bretton Wood institution included it in its Special Drawing Rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. The basket is also a collection of reserve currencies that serve as an alternative to the US dollar. The inclusion of Yuan marked the first time a new currency had been added to the basket since the Euro was launched in 1999. The basket already includes the Euro, Japanese yen, British pound, and U.S. dollar.

According to Bloomberg, one major benefit of being a reserve currency is that the Renminbi, another name for Yuan, would be used to price more international contracts. Most of the commodities exported by China are priced in the U.S. dollars which means that the wellness of the Chinese economy cannot be divorced from the value of its currency vis-à-vis the dollar. Another benefit is that the currency would be in higher demand as many central banks would have to hold it as part of their foreign exchange reserves. This would result in the lowering of interest rates for bonds denominated in the currency.

Speaking on the decision to include the Chinese currency in the SDR basket, Siddharth Tiwari, former IMF’s Director of Strategy, Policy, and Review Department, said “The Renminbi’s inclusion is an important milestone in the integration of the Chinese economy into the global financial system. The IMF’s determination that the Renminbi (RMB) is freely usable reflects China’s expanding role in global trade and the substantial increase in the international use and trading of the RMB. It also recognizes the progress made in reforms to China’s monetary, foreign exchange, and financial systems and acknowledges the advances made in liberalizing, integrating, and improving the infrastructure of its financial markets. We expect that the inclusion of the RMB in the SDR basket will further support the already increasing use and trading of the RMB internationally.”


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